Video: Countertrade: Definition, Types & Examples

Countertrade is an important means of trade used by developing countries. In this lesson, you'll learn what countertrade is, the types of countertrade that are available, and also be provided some examples. A short quiz follows the lesson.

Countertrade is an important means of trade used by developing countries. In this lesson, you'll learn what countertrade is, the types of countertrade that are available, and also be provided some examples. A short quiz follows the lesson.

Definition of Countertrade

Countertrade is a system of international trading that helps governments reduce imbalances in trade between them and other countries. It involves the direct or indirect exchange of goods for other goods instead of currency.

Countertrade is often used when a foreign currency is in short supply or when a country applies foreign exchange controls, which are limits imposed on the availability of foreign currencies to importers for the purchase of foreign products. Countertrade is often used by developing countries to control trade and as a development technique.

Types of Countertrade & Examples

Countertrade can take several different forms. Each form can be used separately or in conjunction.

A direct offset occurs once a seller of a product to be imported into a foreign country agrees to purchase parts or materials used to produce the product. The direct offset will effectively reduce the price of the imported good because of the profit earned by the local foreign company selling components to the seller. Keep in mind that the objective here is to improve trade imbalances between exporting and importing countries. Consequently, the purchaser of the foreign good doesn't necessarily benefit from the direct offset, but the economy of the foreign country does.

Let's say you are a defense contractor that is authorized to sell arms to an ally of your government. One of your potential customers is a small country in Eastern Europe that's interested in buying some tanks. The foreign country agrees to buy a battalion worth of tanks from your company so long as you buy the steel used to make the tanks from one of its steel firms. You agree to the deal and start rolling out the tanks.

The idea behind an indirect offset is the same as a direct offset, but the offset doesn't involve the same trade transaction. An indirect offset occurs when a foreign government requires an importer to make a long-term investment in a country's economy. A common example may be the construction of a factory in the country, which will create jobs and help build the country's economy.

Switch trading occurs when a third country has a trading relationship with two other countries that have a significant imbalance in trade. The third country will purchase what the second country needs from the first country, and then trade it to the first country in exchange for a product that the third country needs. It's not as complicated as it may sound.

Let's say that we have three countries: Alpha, Beta, and Gamma. Beta has a huge trade imbalance with Alpha, which means that it imports much more from Alpha than it exports to it. However, Beta has a trade surplus with Gamma. Beta needs to import tin from Alpha, but it doesn't have enough hard currency or credit acceptable to Alpha. However, Alpha has no problem selling to Gamma. In a trade switch, Gamma agrees to buy the tin that Beta needs from Alpha and then swap it with Beta for goods that Gamma needs from Beta.

A counterpurchase occurs when a foreign exporter agrees to purchase goods or services from the importing country as a requirement of the sale. Unlike a direct offset, the goods that the exporter agrees to purchase are not used as components in the product being exported to the foreign country. For example, a large multinational conglomerate may have an aerospace division and a grocery store chain. The company may agree to buy its tropical fruits from the foreign company in exchange for the foreign company permitting the sale of the company's airplanes.

Barter is probably the easiest form of countertrade to understand. It's simply trading one good for another. For example, a country rich in oil but poor in water may trade oil for water with a country that has plenty of water but not much oil.

Lesson Summary

Countertrade is a means to help countries with trade imbalances trade by means other than the use of hard currency. It's often used when the foreign currency of the potential exporter is in short supply in the foreign country or when the country has imposed limitations on the use of foreign currency for imports.

Countertrade can be undertaken through direct offset, indirect offset, switch trading, counterpurchase, and barter. These methods can be used as the exclusive means of trading in a transaction or in concert.

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